What are futures and how do they work?

Futures are derivatives that obligate two parties, a buyer and a seller, to trade an asset at a set current price until a specific future date. The term derivatives refer to a financial contract that obtains value from underlying assets, commonly financial securities like stocks, bonds or commodities like oil or gold.

What are tradeable futures contracts?

There are tradeable futures contracts for almost any commodity imaginable, such as grain, livestock, energy, currencies, and even securities. In the United States, futures contracts are regulated by the Commodity Futures Trading Commission (CFTC).

What are the two categories of market participants that use futures contracts?

Futures contracts are used by two categories of market participants: hedgers and speculators. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased. They use futures contracts to ensure that they have a buyer and a satisfactory price, hedging against any changes in the market.

Who is taking on the obligation to buy and receive the underlying asset when the futures contract expires?

The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

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